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DEPARTMENT OF MECHANICAL ENGG

7. Introduction to financial management


7.1 Definition of terms such as assets, liabilities, current and long term
assets and liabilities, capital, income, expenses, gain
7.2 Working capital - definition - net and gross working capital - factors
affecting working capital.
7.3 Maintenance of accounts through journal ledger, cash book, balance
sheet.
7.4 Transaction with bank - credits, payments overdraft, current
account, securities.
Finance:- It is a flow of money.
Management:- Control or Managing of money
Financial Management:-It is the process of managing or
controlling flow of money or fund.

Generally:- Financial Management is a process of


acquitting of funds from various sources to meet the
business needs in order to accomplish overall objectives of
the firm.
Definition of Assets and Liabilities

Assets:- It is any item of economic value owned by an individual or


corporation, which can be converted into cash
Or
Assets are bought to increase the value of a firm or benefit the firm's
operations. You can think of an asset as something that can
generate cash flow, regardless of whether it's a company's
manufacturing equipment or an individual's rental apartment.

Liability:-A liability is a company's legal debt or obligation that arise


during the course of business operations. Liabilities are settled over
time through the transfer of economic benefits including money,
goods or services.
In the context of accounting, assets are either current or
fixed (Long term assets).
Current asset:- current asset means that the asset will be
consumed within one year.
Generally, this includes things like cash, accounts
receivable and inventory.
Fixed assets(Long term assets):- are those that are
expected to keep providing benefit for more than one year,
such as equipment, buildings and real estate.
The resources owned by a business can be divided into two
categories: current assets and long term assets.
Some assets are considered liquid, meaning they can be
converted into cash relatively quickly.
Long term assets cannot be converted or are not expected to be
converted into cash.
Long term assets can be considered anything not classified as
current.
Current Liabilities:- the liabilities that are payable within one year
i.e. transaction takes place within one year
It includes salaries,taxes,short term loans etc.

Long term Liabilities:- the liabilities that are payable after one year,
i.e. transaction takes after one year.
It includes mortages,banks loan owed for leases, bond repayment etc.

Capital:- cash or goods used to generate income either investing in a


business or in a different property.

Income:- The amount of money or its equivalent received during a


period of time in exchange for labor or services, from the sale of goods
or property from financial investments.

Expenses:-Money expended or cost incurred in a firm’s efforts to


generate revenue, representing the cost of doing business.

Gain:-it is an increase in value of an asset.(opposite of loss)


It increases wealth, earnings etc.
WORKING CAPITAL MANAGEMENT

The term working capital in the broad sense refers to investments made in
current assets which comprises of cash, debtors, bills receivable, inventories,
etc..
OR
In other words, it is the aggregate of all the currents assets held by a firm as
on the given date it is that part of the capital i.e., retained in liquid form
OR
In accounting working capital is defined as the difference between the
inflows. It is defined as the excess of current assets over current liabilities
and provisions. OR
Working capital also refers to that part of total capital which is used for
carrying out the routine or regular business operations.
TYPES OF WORKING CAPITAL:-
1. Gross working capital.
2. Net working capital.
GROSS WORKING CAPITAL:- This is also known as circulating capital,
operating capital or current capital. It refers to the total of
investments on current assets such as cash in hand, cash at bank,
accounts receivable, stock of finished goods, work-in-progress, stock
of raw materials, prepaid expenses, etc
Gross working capital = total of current assets
NET WORKING CAPITAL:- This refers to the difference between
current assets and current liabilities.
FACTORS AFFECTING WORKING CAPITAL:-

The following are the factors which has its own effect on the working
capital requirements of a concern

1. NATURE OF THE BUSINESS:-

His factors affect the working capital requirements to a great extent.


The public utilities like transport organization services have large fixed
assets so that their requirements of current assets will be low whereas,
industrial and manufacturing enterprises need more working capital as they
have to invest substantially on inventories and accounts.

2. SCALE OF OPERATION:-

A concern which carries its activities on a small scale requires less


working capital when compared to the concerns carrying its activities on a
large scale.
3. GROWTH AND EXPANSION OF THE BUSINESS:-

When there is a growth and expansion plans such firms require more
working capital.

4. LENGTH OF MANUFACTURING PROCESS:-

Longer the manufacturing process higher will be the amount of working


capital requirements and shorter the manufacturing process. Working
capital requirement is less.

5. LENGTH OF THE OPERATING CYCLE:-

Requirements of working capital depends upon the operating cycle the


longer the operating cycle the greater will be the requirements of working
capital like manufacturing concerns and shorter the operating cycle lesser
will be the operating capital like trading concerns
6. PRODUCTION POLICIES:-
It has its great impact on the working capital needs. A capital intensive
industry require more fixed capital than working capital but labour
.
intensive industry requires less fixed capital but more working capital.
7. RAPIDITY OF TURNOVER:-
This has the great impact on the working capital requirements because
a firm which can affect its sales with great speed requires less working
capital than the firm’s which cannot effect its sales at a great speed.
8. SEASONAL FLUCTUATIONS:-
This factor effects working capital requirements because seasonal
factors create production and shortage problems.
For ex:-seasonal agricultural production must be purchased in the month
of production for smooth running of business for the full year. Similarly,
demand of woolen clothes is in the winter only but has to be
manufactured throughout the year resulting in more working capital.
9. DIVIDEND POLICY:-
A company which follows a liberal dividend policy which require
more working capital than a company which declares stable
dividend policy
10. TAXES:-
Higher taxes are a strain on the working capital of the firm.
11. DEPRECIATION POLICY:-
This has an indirect effect on the working capital of the firm
because when a company charges higher depreciation it reduces
the profit available for dividend and results in the less outflow
of cash in the form of dividend.
12. PROFIT LEVEL:-
A company which can earn high profits can contribute to the
generation of internal funds which results in contribute to the
generation of internal funds which results in contribution to
more working capital.
MAINTAINING BOOKS OF ACCOUNTS

Complete and correct accounts in respect of each


monetary transaction occurring shall be maintained
through prescribed books of account including registers as
indicated below:
1. Cash book
2. Journal Ledger
3. Balance sheet etc.
Cash book:- The Cash Book is the principal
record of all money transactions taken place
every day and all other
registers are subsidiary. It should be
maintained as per format appended with this
study material.
LEDGER
ledger is also an important register in which all transactions recorded in
the cash book are classified under different heads of accounts as codified.
The ledger should be kept in the prescribed
form.
Separate pages need to be opened for each item of expenditure. The
ledger accounts shall be arranged and grouped in such a manner that the
desired information is promptly secured. All the
ledger accounts shall be closed at the end of the month. Totals would also
be made in the classified abstract.
Monthly totals of various ledger accounts shall then be tallied with the
totals of classified abstract and discrepancy, if any, will be rectified and
reconciled. Bank account shall be posted from the daily totals of cheques
issued and challenges / remittances (deposited) made into the bank.
BALANCE SHEET
Financial statements are a company's window to the world.
They tell the story of how successfully or unsuccessfully a
company has performed for any given period. The three most
common financial statements are the income statement,
balance sheet, and statement of cash flows. Of the three
statements, the balance sheet is the one that gives the
clearest picture of the financial position of a company. The
balance sheet is made up of three different sections: assets,
liabilities, and stockholders equity. Each of these sections is
further divided down into subsections.